Chapter 5: Conducting Due Diligence
The adjustment process explained in the previous chapter applies to more than just the market approach. This process of due diligence and altering of future expectations is vital to understanding the true value of intellectual property and future cash flow.
A lack of due diligence can leave you stuck in an asset where you may never break even nor get your desired return for a long period of time. So it is important that when you invest in these assets, you obtain a fair price and develop a clear and accurate valuation of the investment.
No one right way exists to conduct due diligence. But this chapter provides five key steps and the necessary resources to engage in a lengthy investigation into the potential of an asset under consideration.
1. The Defining Characteristics of the Royalty Stream
When purchasing royalties we want to know the specific types. Are they mechanical, public performance, synchronization or print rights? Are they Master Recording rights or rights granted to songwriters?
● Full or Partial Rights: Can you buy all or portions of a royalty stream to one individual song? Or royalty streams of a portfolio that includes several songs or albums? This variety creates different possibilities for your investment’s return.
● The Lifetime of the Copyright: Each royalty stream varies according to duration of the music copyright. You want to determine the value of your return by how many years you can expect payment based on your ownership rights. Some royalty streams can be short: Perhaps a five- to 10-year time frame.
● One Song or Many Songs: One individual song by itself or in a portfolio can generate significant royalty payments. The song may appear in a hit film. It could appear on a popular television show. It also may feature in the rotation of sports events or advertising campaigns.
2. Gage the Song’s Popularity and the Musician’s Popularity
Technology allows investors see what is currently popular and trending. We can obtain a wealth of data through various online and digital platforms to determine the value of these assets over the long-term. These can help in our decision- making process.
First, we want to use accessible tools to determine the popularity of a song or asset. We can do that by exploring a number of different online platforms.
Many songs have accompanying music videos or that play regularly on video platforms accessible by users. Those considering a purchase of an asset should look to video-streaming sites like YouTube for more insight into how often these songs are played.
YouTube is typically the best source of information on music demand. The Google-owned video site is responsible for 40% of all music consumption in the United States. If you’re looking to quantify the historical popularity of this song, be sure to access as many pages as possible that feature this asset.
For example, each YouTube video features three critical pieces of data.
View Count: This tells you how many times that viewers have watched the video or listened to the song.
Upload Date: This is important because the view count is based on how many times it has been seen since a user uploaded it. If one video has been watched the same number of times as another, but it was uploaded a year later, we can consider the first video to be more popular and in greater demand.
Sentiment Metrics: There are two small icons, a Thumbs Up and a Thumbs Down below each video on YouTube. These are important because we can use these figures to determine a percentage of individuals who enjoy this song. In addition, a higher number of votes indicates an increased amount of user engagement.
An Example of a Popular Song on YouTube
In the image above, we can see that a version of “Beast of Burden” by The Rolling Stones has generated a significant number of views. Uploaded originally in 2007, this song has generated more than 12.6 million views on this individual YouTube account alone.
Nearly 36,000 views like this song according to the Thumbs Up icon compared to just 980 people with an unfavorable view.
And this is just one YouTube channel featuring this song. Type in the keywords “Beast of Burden” and “Rolling Stones” into the YouTube search box, and you will find 104,000 results.
Given the increasing popularity of streaming services, we can obtain information on the number of times that a song has been played on specific platforms. For example, individuals can access data on sites like Spotify Charts which provides daily insight into the number of streams a song receives.
Billboard charts display the rankings of any album or song comparable to its genre.
Nielsen ratings can show the possible royalty stream from music used in current popular television shows.
Determining the Artist’s Popularity
Regular News Updates
Google News is an excellent source of updated information on any asset class, musician, or genre. Investors considering the purchase of a specific music asset should establish an RSS feed that ensures regular updates on that song or musician are sent directly to their email in real-time. More information about that process can be found here.
Scan Social Media Platforms
Social media platforms offer insight into the broad and general metrics of how many fans want to belong and interact within the pages of musical groups and performers.
Facebook: Musicians typically have both personal and fan pages. Investors should be interested in the number of fans that follow the musician. Fan pages can be accessed through the basic search tools available on Facebook.
Twitter: The micro-blogging service has created a communications balance that allows anyone access to anyone else through 140-character messages. Users of Twitter engage with Followers – other individuals who subscribe to a message feed or each other. Twitter profiles provide a breakdown of the number of followers that a musician or songwriter has. This is important for two reasons. First, it provides a deeper understanding of how many fans are engaged in the work and actions of a musician. Second, a large audience is important for marketing purposes of their music, works, and tour. Additionally, anyone engaged in a diligence process can use the search function on Twitter to see if people are talking about a specific musician or song.
Photo Sharing Sites: Photo-sharing sites allow investors to see how many of those followers share pictures and videos in their social community. These include Instagram, Pinterest, and Flickr. Like other social media platforms, these sites offer statistics into the number of followers and posts of an active musician or songwriter.
Be sure to scan the wealth of music blogs available that provide up-to-date information on a musician or band. Breaking news emerges regularly in this industry, and includes updates and insight into the popularity of specific genres and songs.
Digital Music News rank the following blogs as the Top 20 online today.
7. Your EDM
8. Pop Justice
10. Drowned in Sound
11. Fake Shore Drive
12. All Hiphop
13. EDM Sauce
15. Rap Radar
16. 2 Dope Boyz
19. Indie Shuffle
Investors should search on Google, Bing, or other search engines for additional blogs that cater to the specific genre of the music asset.
3. Determine the Trend of Royalty Income
As an investor you want to know how much money a royalty stream has generated in the past. While past performance doesn’t guarantee future returns, it is our best source of data to make forward-looking estimates.
Investors can measure performance based on one year or several years of past royalty payments generated by the asset.This can offer a strong historical average and baseline for projections.
The other key number is the quarterly royalty payments over the last year. The last 12 months’ total returns tell us whether a royalty stream is trending up over previous years.
We also want to inspect the four individual quarters. This can help us identify key trends affecting the song. These include:
Income tied to touring schedules
Timing of foreign royalty payments
Release in a television show or advertisement
Other metrics that might go unnoticed without proper evaluation
The last three years tells us if royalty stream payouts are increasing, decreasing, or flat. We can see in a graph if short-term spikes exist.
4. Determine if Your Data Set is Complete
The underlying determination of a song or royalty stream’s true value lies in its usage data.
There’s just one challenge. The usage data – collected by groups like SoundExchange, ASCAP, and BMI – is not usually released for public consumption.
When little transparency exists, it’s harder for buyers to determine a royalty’s value. Imagine being told that you can buy Apple stock at $100 per share, but you have no past knowledge of its iPhone sales or its projected sales into the future.
How would you know if you’re getting a fair value? The seller of intellectual property has access to a data set on the performance and royalties associated with the asset. This offers investors a chance to assess past usage on all media sources that have played a song. Investors can see how much the song has generated in in royalty payments depending on the PRO or other collections organization.
By using this method, we are able to calculate the net present value and three important measurements for the associated royalty asset. We can project future royalty payment streams, its payback period and lifecycle, and risks associated with future expectations for this asset.